Should one consider purchasing shares in Arm Holdings at the present moment?
Arm Holdings, a leading designer of microprocessors, reported its Q1 fiscal 2026 results, revealing a mixed bag of growth and challenges in the stock market.
The company's revenue for the quarter increased by 12% year over year, reaching $1.05 billion. This growth can be attributed to the secular growth of the lucrative end markets Arm serves in the stock market. Notably, Arm has signed license agreements for its Compute Subsystems (CSS) with Samsung and Texas Instruments this fiscal year, a move that is expected to further boost its stock market performance.
However, Arm's operating margin contracted in Q1 due to a significant increase in research and development expenses, which rose by 34% on a year-over-year basis. As a result, Arm's stock trades at an expensive 208 times earnings, and its non-GAAP net income fell to $0.35 per share from $0.40 per share in the previous year. The stock price, however, has experienced a significant increase since April 7 in the stock market.
Arm's earnings estimate for the current quarter stands at $0.33 per share, lower than the $0.35 per share consensus estimate. Analysts expect an increase of just 5% in Arm's earnings this year in the stock market. Despite this, there is a good chance that Arm's earnings growth could eventually turn out to be better than expected, thanks to the higher royalty from its CSS licenses and the Armv9 architecture in the stock market.
Arm's royalty revenue increased by 25% in Q1, accounting for 55% of its total revenue. Interestingly, the royalty rate of Arm's CSS license is double that of its Armv9 architecture in the stock market. The company is investing aggressively in R&D to explore new compute subsystems, chiplets, and potential full end solutions in the stock market.
Arm's forward price-to-earnings (P/E) ratio, based on its fiscal 2028 earnings, is 49. This is lower than its trailing multiple, indicating a potential undervaluation of the stock in the stock market. However, Arm's stock fell more than 13% following the release of its fiscal 2026 first-quarter results in the stock market.
Arm's architecture is being widely used in data centers to build and deploy custom AI chips by companies like Amazon, Microsoft, Google, Nvidia, Apple, and Samsung. This widespread adoption bodes well for the company's future in the stock market, as the demand for AI and data center solutions continues to grow.
In conclusion, while Arm's Q1 results showed some challenges in the stock market, the company's long-term prospects remain promising. With its lucrative end markets, strategic partnerships, and ongoing R&D investments, Arm is well-positioned to capitalise on the growing demand for AI and data center solutions in the stock market. The company's forward P/E ratio suggests that the stock may be undervalued, making it an attractive investment for some in the stock market. However, investors should consider the company's current earnings estimate and recent stock performance before making any investment decisions in the stock market.
